Champion Chemical Corporation is planning toexpand one of its propylene manufacturing facilities.At n = 0, a piece of property costing $1.5 millionmust be purchased to build a plant. The building,which needs to be expanded during the first year,costs $3 million. At the end of the first year, the company needs to spend about $4 million on equipmentand other start-up costs. Once the building becomesoperational, it will generate revenue in the amountof $3.5 million during the first operating year. Thiswill increase at the annual rate of 5% over the previous year’s revenue for the next nine years. After 10years, the sales revenue will stay constant for anotherthree years before the operation is phased out. (It willhave a project life of 13 years after construction.)The expected salvage value of the land at the endof the project’s life would be about $2 million, thebuilding about $1.4 million, and the equipment about$500,000. The annual operating and maintenancecosts are estimated to be approximately 40% of thesales revenue each year. What is the IRR for thisinvestment? If the company’s MARR is 15%, determine whether the investment is a good one. (Assumethat all figures represent the effect of the income tax.)
Champion Chemical Corporation is planning to
expand one of its propylene manufacturing facilities.
At n = 0, a piece of property costing $1.5 million
must be purchased to build a plant. The building,
which needs to be expanded during the first year,
costs $3 million. At the end of the first year, the company needs to spend about $4 million on equipment
and other start-up costs. Once the building becomes
operational, it will generate revenue in the amount
of $3.5 million during the first operating year. This
will increase at the annual rate of 5% over the previous year’s revenue for the next nine years. After 10
years, the sales revenue will stay constant for another
three years before the operation is phased out. (It will
have a project life of 13 years after construction.)
The expected salvage value of the land at the end
of the project’s life would be about $2 million, the
building about $1.4 million, and the equipment about
$500,000. The annual operating and maintenance
costs are estimated to be approximately 40% of the
sales revenue each year. What is the IRR for this
investment? If the company’s MARR is 15%, determine whether the investment is a good one. (Assume
that all figures represent the effect of the income tax.)
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